The picture isn't entirely bleak. People do seem to learn some important truths about the ups and downs of the market. As they age, they tend to have more diversified portfolios, which gives them some protection from sharp declines in individual holdings.

But there's a catch, and it's a nasty one. As people grow older, their cognitive ability tends to diminish - a gradual decline that presumably affects decision-making in all facets of life. In investing, the researchers concluded, it makes older people less capable of picking market-beating stocks. The net result - at least for those who trade individual stocks of their own choosing - is that overall investment performance declines steadily with age.

The study - "Does Investment Skill Decline Due to Cognitive Aging or Improve With Experience?" - has been circulating this summer as an academic working paper. Its authors are two finance professors at the University of Notre Dame, George M. Korniotis and Alok Kumar. A copy is available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=767125.

For their study, the professors obtained access to an extensive database at a major discount brokerage firm containing the stock holdings and trades in more than 75,000 accounts between 1991 and 1996. The researchers agreed not to divulge the identity of the firm and were not given the names of any account owners, just some demographic characteristics, including age, income, wealth, occupation, marital status and gender.

The brokerage accounts were self-directed, so the professors said they believed it was safe to assume that each account's holdings and transactions reflected its owner's decision-making. Furthermore, after examining other aspects of the database, the researchers said they became "reasonably confident" that these accounts represented the bulk of their owners' assets available for investment.

First, the good news about the research. The professors did find evidence that most investors learn as they age. Older investors were less likely to make all-or-nothing bets on a single stock or sector, for example; their portfolios tended to hold significantly more stocks than those of younger investors. Older investors were also less likely to reflexively sell winning stocks and hold losing ones, regardless of the stocks' prospects; this tendency is a common one and it can be very costly. On both of these particular scores, aging turned out to improve returns, adding about 0.7 percent a year to the performance of the average 65-year-old's portfolio, according to the researchers, relative to the average 30-year-old's.

Now the bad news. As far as stock-picking goes, investors seem to get worse as they grow older. To be sure, no age group was able to consistently pick market-beating stocks. But investors' stock picks tended to lag the market by ever-increasing amounts as they grew older.

The researchers concluded that it was most likely caused by the cognitive decline associated with growing older. "The evidence from cognitive aging research suggests that decision-making ability is likely to deteriorate with age due to a decline in general intelligence and information processing ability," according to the professors. "Effective and timely reaction to new information is one of the key defining characteristics of investment skill."

In terms of portfolio performance, the negative effects of impaired stock-picking ability outweighed older investors' other advantages, according to calculations by the professors. They found that the average 65-year-old investor's stock picks lagged behind those of the average 30-year-old investor's by 1.8 percent a year. The overall effect of the aging process was for 65-year-olds to have an average annual return about 1.1 percent lower than the typical 30-year-old's.

Because every age group in their study trailed the market, the researchers believe that all investors should favor index funds, which mirror the performance of the market and don't attempt to beat it. This advice becomes increasingly important as investors grow older.

If older people nevertheless want to invest in individual stocks, they shouldn't try to pick them themselves, the professors said. "Our hope," they said, "is that older people would recognize the adverse effects of cognitive aging and would try to compensate for those effects by seeking advice from a financial adviser or some other qualified investment professional."

The professors' study does contain a silver lining: the stock market may actually perform better as the population gets older. This tantalizing prospect depends on a number of assumptions. Fundamentally, they said, if older investors are aware of their declining investment skill, they may demand a higher premium for investing in the stock market. Consequently, stock market returns may increase as the population ages.

They concede that this particular consequence of their study is tentative, and they are working on further research to test it. But it at least holds out the prospect that the aging of the enormous baby boom generation won't be entirely bearish for the stock market.